Alcoa Turnaround Only Seems Ambitious

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At its annual investor day event Thursday, Alcoa Inc. (NYSE: AA) announced a new three-year plan to drive its revenues higher and cut its costs. The company noted that in the period 2010 to 2013 it will generate additional combined revenue of $1.6 billion, primarily due to $1 billion in additional sales of its value-added engineered products and $800 million in its midstream rolled products segment. The inference we draw is that the commodities business is losing money.

For the period 2014 to 2016, Alcoa plans to raise an additional $1.2 billion in revenues from its downstream businesses and $1 billion in incremental revenue from its midstream business. As for the commodities business, it is expected to improve its cost structure.

Now all this might ordinarily have sent the stock price a bit higher yesterday, but the London Metal Exchange (LME) also announced yesterday new rules for moving aluminum more quickly out of its warehouses. Big aluminum users like Coca-Cola Co. (NYSE: KO) and MillerCoors, a joint venture between SABMiller and Molson Coors Brewing Co. (NYSE: TAP), have complained to the LME about the long waits to get aluminum out of the warehouses, forcing them to buy on the spot market from producers like Alcoa. Regardless of what the LME announcement really meant for Alcoa, the stock took a hit yesterday that it probably did not deserve.

Alcoa has profited from the warehousing issue. But, as the CEO pointed out, Alcoa has managed to break its dependence on the commodity price by going into higher margin businesses. The current spike in the aluminum commodity price has helped Alcoa, but the company’s ability to wring costs out of its alumina and aluminum production is what really matters.

Alcoa’s plan to add $2.2 billion to its revenues in the next three years depends on higher prices from three basic aluminum consumption sectors: transportation, construction and packaging. More cars and airplanes need to be built, more construction demanding more HVAC systems and other aluminum-based products needs to get started, and consumers need to drink more pop and beer. Virtually all of those things depend on a stronger economy, and Alcoa cannot affect that very much.

The current estimate for Alcoa’s 2014 revenues is $23.12 billion, so over the three-year period to 2016, we might expect total revenues of around $70 billion. Growing revenues by a total of around 3% over three years is not terribly impressive.

Shares were down about 0.1% in the first few minutes of trading on Friday, at $8.91 in a 52-week range of $7.63 to $9.97.

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